Business Finance: Profit, Cash Flow, and Working Capital

This report provides an overview of business finance, focusing on profit, cash flow, and working capital. It explains the difference between profit and cash flow, defines accounting terms like working capital, receivables, inventory, and payables, and discusses how changes in working capital affect cash flow. The report also explores strategies to manage financial results and improve cash flow. Additionally, it delves into the purpose of preparing a budget and examines the traditional and alternative budgeting approaches.

BUSINESS
FINANCE

Table of Contents
EXECUTIVE SUMMARY.........................................................................................................................3
PART 1.......................................................................................................................................................3
(a) Profit and cash flow and their difference............................................................................................3
(b) Meaning of accounting terms.............................................................................................................4
(c) Changes in working capital affect cash flow......................................................................................5
2. Manage financial results......................................................................................................................5
3. Analysis and recommendations...........................................................................................................7
PART 2.......................................................................................................................................................8
EXECUTIVE SUMMARY.........................................................................................................................8
1. Purpose of preparing budget................................................................................................................8
2. Application of traditional and alternative budgeting approach for planning cost of second sight plc
...............................................................................................................................................................11
3. Analysis of best approach..................................................................................................................11
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................13

EXECUTIVE SUMMARY
Business finance relates to the money management practice for the business. This is
important in managing a business. An organization's effectiveness depends on how well its
executives handle cash-making streams. This report is based on Mediterranean Delights Ltd. data
gathering. Within this concept of benefit and cash flow the impact of working capital on cash-
flow tasks and ways is explained which allows managers to produce successful cash-flow tasks
with the support of successful working capital management.
PART 1
(a) Profit and cash flow and their difference
Profit- The term benefit defines company sector entities as a net price of tax benefit aeries across
their operations. Either financial or non-financial, it is a part of any company organization. It
demonstrates the company's progress and good operating position (Burns and Dewhurst, 2016).
Cash flow- It describes a net quantity of gash generated by flow activities and outflow. Cash
flow announcement is used by business associations to analyze the activities supporting
production money from financing, investment and operations. This allows management to make
its fund strategy choices. Some believe that the cash flow and dividends are similar, although
there is definitely be a disparity below.
Difference between profit and cash flow:
Particular Profit Cash flow
Meaning Positive differences in revenue
and production and running
costs.
Money interest that flows in or
out of a specific time.
Time No time for calculating profits
will be set. Companies can
calculate their profits on a
monthly or regular basis.
No time for calculating profits
will be set. Companies can
calculate their profits on a
monthly or regular basis.

Calculation Profits can also be calculated
using different forms in
financial accounting or.
Economic year revenue
calculated by income and loss
readiness comment.
Cash flow statements are
compiled by administrators to
explain the net cash flow
activity. Cash flow reports are
graded by the manager.
Purpose Set up competitiveness within
the competitive environment.
Financial achievement
acknowledges practices to
generate money.
(b) Meaning of accounting terms
Working capital- It determines the estimated cumulative worth of a company's liquid assets.
Working capital can be a key term used every day for an organization’s company. Manager uses
working capital to fulfill the main requirements of these companies. Gross working capital
means an increase in power and networking capital may be the gaps between a company's
current assets and liabilities. In this term, efficiency and short term financial health can be
achieved (Tomkin, 2016).
Receivable-The term applies to the actual demand for the products and services they purchase for
their buyers from the businesses. This considered companies to be current assets. The debtor-
claim ratio is used by management to determine the degree of success of their customers to
compensate their sum of liability.
Inventory- In accounting the inventories are net value of waste and other equipment and tools
needed by an organization to generate goods and services with its own customers. There are
different forms of inventories such as raw material, finished goods and work in progress goods.
Payables-This term defines the value of economic funding owned by companies of their own
creditors in order to successfully conduct their small business. It generated responsibilities for a
corporation. This term is used by managers to identify a net series of short-term company
obligations (Maxwell, 2017).

(c) Changes in working capital affect cash flow
Working capital is the significance of current assets to meet organizational short-term
obligations. It will impact cash generation operations directly. Total number of usable tasks is
cash flow. Cash inflows are probably decreased by a rise in the amount of receivables. Enhanced
stock valuation often decreases flow capital. When the creditors' amount decreases, the
production of cash flow operations would definitely rise. Higher valuation of assets shows a
weak cash inflow rate (Guilding, 2007). The working capital can affect cash flow in such
manner:
 Purchase of inventories- A company's cash flow can be affected by asset purchases. It is
because businesses tend to spend cash to purchase products, which has an effect on the
financial position. However, this can be regained by purchasing stocks for cash.
 Increase in trade receivables- If trade receivables rise, businesses have the potential to
produce debtors' cash. This would have a significant effect on the cash balance of
businesses.
2. Manage financial results
Mediterranean Delights Ltd is headquartered in London, operates the delivery chain, and
insures the whole South London market. Their fertility holding has been changed in their prior
year as a result of the lack of effective working capital power initiatives. Impact on cash flow
statement:
Cash flow statement at the end of the year 2017
Amount
(£
Million)
Amount
(£
Million)
A Cash from operating activities:
Net profit before tax and interest 5
Advance payment (8)
Working capital adjustments:
Increase in debtors (2)
Increase in creditors 1.5
Bad debts (2)
Net cash from operating activities (5.5)

B Cash from Investing activities:
Investment in stake acquisition (10)
Net cash used in Investing activities (10)
C Cash from Financing activities:
Net Increase in cash and cash
equivalents (A+B+C) (15.5)
Interpretation: The statement shows that of the three exercises the organization is paying £ 15.5
million, which is a huge sum. The primary purpose for this negative income is advance
installment and procurement. As both will create income later on, however an enormous sum has
been obstructed by the organization ahead of time installment, which then again has requested
the requirement for additionally working capital, with the organization procuring just around 5
million lakes which this complete Is 33% of the sum. So the organization needs to take more
obligations from outside to fill this hole (Bhattacharya, 2014).
Profit- Company generates profits from various operations of five million in last year and works
together. Due to the advice on deficiencies, it was assumed that the company will make this
profit following deduction of the borrowing obligations for tax and interest.
Cash Flow- Mediterranean ltd creates cash inflow by attempting to market their products. Debt
securities are now rising from 16 to 18 million. Cash flow activity in the last year has increased
because the Italian company has invested money. They also cover embargoes for their conflicts
Payable- the MDL payable is growth that adversely affects company, whilst wishing to pay the
debt amount more than existing capital (Mathur, 2007).
Working Capital- Working capital levels decrease due to disputes between potential customers
and their sources of raw materials. For different cause there is a percentage of payable
production. While improvements in the framework of finance would have a negative effect on
working capital but has a low turnover in previous decades. Mediterranean Delights Ltd is
willing to manage their task by help of various kinds of available current assets.

3. Analysis and recommendations
This is essential for business entities for manage their cash flows and in order to improve
cash flow of company, there are different kinds of course of action which are as follows:
Delay or postpone the investment program- Companies may spend large amounts of cash for
investment ventures, contributing to reduced cash flows. By preventing investments, companies
can increase cash flows. Such as above company can apply this to enhance their cash flows.
Identify and sell any unwanted assets-That is also a method of improving company cash flow.
The selling of certain properties that are not in service can be possible. This allows businesses to
earn higher cash, resulting in increased cash flow (Michalski, 2014).
Minimize the expenditure on legal fees and settle the litigation as soon as possible- It will be
easier for businesses, if companies cut legal fees, to get higher cash value in their accounts.
Resolve the on-going disputes and improve relationships-Despite ongoing controversies,
businesses continue to spend cash and thus face a problem of weak cash flow. If businesses settle
their conflicts, so investing cash in their accounts will be simpler.
PART 2
EXECUTIVE SUMMARY
Budget is a statistical statement where managers are expected to predict potential
financial gains from their small business through industry associations. It is used to develop
decision-making techniques. Additionally, the manager uses strategy regardless of the success
method. This research examines the basic dependence on decision-making funds and investigates

critically the effect on a company's performance of different communication strategies.
Conventional and new budgeting approaches for company administration systems are also
analyzed.
1. Purpose of preparing budget
A budget is a qualitative strategy established by the company with tax implications for a
specified period usually spanning 1 year. Often businesses plan their yearly budget with the
profit for each year. Herein, below purpose of budget is mentioned below in such manner:
Tool for decision-making- The key goal behind preparing funds is to expand own decision-
making mechanism to a financial system. They are the route steps that may or must not be
prepared by help of budgets. With the support of the funding advisor, the sales and costs of the
approved operations are estimated and company activities are handled depending on funding
(Wildavsky, 2017).
Forecast of Revenue & cost- Budgeting is a significant field of business strategy. Business and
different companies’ owners estimate benefit and loss whether a business is going to produce a
profit or not. The primary goal in marketing is to establish a strategic strategy to publicly
disclose the activity of the product. This helps to develop schedules, activities and schedules.
Monitoring of the efficiency of the organization and funding finance to monitor actual company
results to be quantified against activity forecasts. Then monitor the activities of businesses and
follow the financing to make projections that help vision plc to expand their SMEs.
So these are the purpose of budget for companies.
(a) Traditional budgeting approach
Traditional budgeting is only a way of preparing financing according to the budgets of
the previous year. When the traditional preparation method is used, the planning takes priority in
the last year. In other words, Traditional budgeting for a specific time period under evaluation is
the method used to plan the spending plan of the Firm, when the preparatory budget is regarded
as the basis for preparing that spending plan of the current year that is the budget of the current
financial year, by making any changes with last year's spending plan (Bouma, Jeucken and
Klinkers, 2017).

Strength Weakness
Gives a benchmark to every chief. It
gets simpler for administrators to get
data about which heading they need to
move.
Incapacitated: Uses more established
apparatuses, for example, spreadsheets.
Offers the chance to embrace
decentralization to meet the expressed
goals.
Difficult to change: Once the monetary
allowance is readied, it is hard to
reconsider.
It has been utilized by supervisors for
quite a while; Hence they are notable
and simple to make spending plan.
Neglected to control representatives
progressing in the direction of the
objective (Sagner, 2010).
b) Alternative Budget Approach:
Also known as the cutting edge spending technique, this methodology comprises of three unique
strategies and approaches for spending arrangement. These methodologies are talked about
underneath:
Rolling budget: In this methodology the old spending plan is continually supplanted by the new
spending plan. Another financial limit is set up before the finish of the old spending plan; It
encourages the administration to get ready in excess of 80 percent precise spending plan. This
can be considered as an endless procedure for a business.
Strength Weakness
Make business increasingly
delicate to showcase changes.
Applies just when conditions and
conditions change consistently like
blast, expansion, collapse, and so
forth.
Because of rehashed planning, it
permits the association to make a
spending that is near genuine
(Ward, 2012).
This methodology requires experts
who charge a high measure of cash
which makes it costly.
Zero based budget: The term zero-based budget was coined by "Peter Pyre". In a zero based
budget, budget estimates are initialized from zero. In the zero-based budget, the last year's
expenditure-related data is not given any importance. Work in this system is started on the basis
that the budget for the next period is zero.

It is the responsibility of every manager to explain why it is necessary to spend money in a
project or plan and what kind of loss will happen if this project or plan is not started. That is, no
new money is released until the work or project is justified. That is, there is a provision in this
process that every manager has been given the burden of giving proof that he should explain why
he should spend the money (Scapens, 1991).
Activity based budget: An activity-based budget - ABB 'activity-based budgeting is a method of
budgeting in which the costs of costs are recorded in each functional area of an organization and
their relationships are defined and analyzed. Activity-based budgeting of inflation or business
development Instead, activity-based budgeting is efficient in business operations based on these
tasks. Seek work and development budget (Scapens, 1991).
The activity-based budgeting process can be simplified into a three-step process first, relevant
activities are identified. These cost drivers are the items responsible for revenue or expenditure.
Second, the number of units related to each activity is determined as the baseline for calculation.
Finally, the cost of the activity is determined per unit and multiplied against the activity level.
2. Application of traditional and alternative budgeting approach for planning
cost of second sight plc
As both approaches have their advantages and limitations for the company. Application of
various methods:
I. Traditional approach: The organization needs to take a base year for the present year's financial
limit. Followed to £ 250 million income a year ago, it intends to open a branch where 800
representatives will work. Work is less expensive in India, so at any rate 500 representatives
should build its expense for the worker by 25% from the past one. As indicated by this view the
organization should expand its income by 20%.
II. Rolling Budget: The organization needs to make a financial limit for the following a half year
before the finish of this present month. The company's present obligation is around £ 50 million
and the promoted share is £ 300 million.
III. Zero Based Budget: Second Sigh Plc prepared for joint endeavor in India which is another
and diverse area for the organization. It can begin all expenses at level zero. First it needs to

comprehend the conditions like work rate, accessibility of assets in India; Whether it needs to
import assets or is accessible in the host nation (Porter and Norton, 2012).
IV. Activity Based Budget: The organization's primary business is eyeglasses and shades that
supply it to different organizations. In this manner it should concentrate more on tasks and
transportation, lessening different expenses and overhead.
3. Analysis of best approach
In light of the investigates led above, it is unequivocally suggested that the organization ought to
receive a zero-based spending approach as Second Sigh plc is going to begin another business in
another condition where the expense is totally not quite the same as beginning it without any
preparation need to.
Why not the customary methodology?
In any case, the customary methodology is appropriate just for the development of business,
however just in the present conditions and market. It has no key job for the new market. In this
manner it may not have any significant bearing in another joint endeavor venture with an Indian
organization (Bendell and Doyle2017).
Why not roll and action based spending plan?
Rolling spending plan is additionally appropriate for existing business, it can assist the
organization with avoiding surprising circumstances, yet it cannot support the business, when it
intends to open in new conditions (Haeger, 2017).
 While movement based planning is just useful when action based costing is known.
However, in this present circumstance where everything begins without any preparation,
it isn't useful (Drury, 2013).

CONCLUSION
Hence, on the bases of above analyses, it can be concluded that; Budget is the account of
estimated revenue and expenditure of any government. The most important element of public
administration is the financial system. Money is required for all the work done by the
government. Where will this money come from and where will this money be spent. All these
things should be well thought out and well organized. This system is known as budget.

REFERENCES
Books and journals
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Bhattacharya, H., 2014. Working capital management: Strategies and techniques. PHI Learning
Pvt. Ltd..
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finance. Routledge.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Drury, C.M., 2013. Management and cost accounting. Springer.
Guilding, C., 2007. Financial management for hospitality decision makers. Routledge.
Haeger, J.D., 2017. John Jacob Astor: Business and Finance in the Early Republic. Wayne State
University Press.
Mathur, S.B., 2007. Working Capital Management and Control: Principles and Practice. New
Age International.
Maxwell, D., 2017. Valuing natural capital: Future proofing business and finance. Routledge.
Michalski, G., 2014. Value-based working capital management: determining liquid asset levels
in entrepreneurial environments. Springer.
Porter, G.A. and Norton, C.L., 2012. Financial accounting: The impact on decision makers.
Cengage Learning.
Sagner, J., 2010. Essentials of working capital management (Vol. 55). John Wiley & Sons.
Scapens, R.W., 1991. Management accounting: a review of contemporary developments.
Macmillan International Higher Education.
Tomkin, S.L., 2016. Inside OMB: Politics and Process in the President's Budget Office: Politics
and Process in the President's Budget Office. Routledge.
Ward, K., 2012. Strategic management accounting. Routledge.
Wildavsky, A., 2017. Budgeting and governing. Routledge.